OREANDA-NEWS. Fitch Ratings has affirmed French packaged food group Labeyrie Fine Foods SAS's (LFF) Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. Fitch has also affirmed LFF's EUR275m senior secured notes due 2021 at 'B+'/'RR3'.

The affirmation reflects LFF's resilient business profile, which is balanced by high business risk. The group achieved sound growth in the financial year to June 2014 despite a difficult trading environment characterised by soft demand, intense competitive pressure and high raw material prices. The group's high business risk relates to limited geographic and product diversification as well as high seasonality of sales. This is, however, counterbalanced by its moderate leverage relative to its rating category. Based on the group's track record and management's commitment to a conservative financial policy, Fitch expects this strong financial profile to be maintained despite likely growth through bolt-on acquisitions.

KEY RATING DRIVERS

Resilient Business Model
LFF's sales resilience reflects its niche positioning in the premium pleasure food market, which has proven highly stable through economic cycles. The group benefits from the leading position of its core brands in the French market, which strongly enhances its capacity at delivering sales growth in a weak consumer environment.

In an environment of high competition and intense price pressure from food retailers, Labeyrie managed to record 5.2% sales growth and 40bps y-o-y EBITDA margin improvement in FY14. It also gained market shares in all product categories in FY14 and 1HFY15.

Sustained Profitability
Fitch expects LFF's EBITDA margin to be at or above 8.3% over the FY15-FY17 period (FY14: 8.9%). Raw material prices fluctuations, combined with FX variations (notably depreciation of the euro against the British pound in FY15), should continue to exert pressure on gross margin. Furthermore we expect the group to maintain significant marketing investments to to support demand in a weak consumer and highly competitive environment. However, these negative factors are likely to be counterbalanced by further industrial efficiencies and product mix improvements.

Profit Seasonality
LFF generates on average 40% and 65% of its sales and EBITDA, respectively, between October and December. The seasonality of the business represents a significant business and financial risk, especially if it coincides with an external shock (such as a food scare) during the Christmas season. Fitch views positively management efforts to reduce this risk by expanding its product range to less seasonal food. The development of the French Everyday Delicatessen division (Blini-branded products, herring, elaborated prawns: less seasonal products), whose share in consolidated EBITDA increased to 33.3% in FY14 (FY11: 31.2%), illustrates these efforts.

Scale and Diversification
LFF's scale is small compared with packaged food peers rated in the 'B' category. Limited geographic, product and customer diversification leads to high business risk. This is only partially offset by the group's high-quality image and presence across various food counters. In this context, Fitch views positively management's success at securing a new sales contract with Co-operative group in the UK. This should improve the business units' low customer diversification and have a positive impact on EBITDA through increased capacity utilisation rate. However, Fitch still believes LFF's diversification efforts will only generate meaningful benefits in the long term.

Positive Free Cash Flow
LFF's free cash flow (FCF) generation should remain positive at around 1% of sales per annum over FY15-FY17, due to top-line growth and a resilient EBITDA margin, limited working capital outflow due to continued tight management, and fairly low capex needs. This leaves some financial flexibility for bolt-on acquisitions.

Conservative Leverage
Due to seasonality, debt moves upwards in the quarter ending in December, with intra-year leverage peaking at a level that Fitch estimates on average approximately 1.0x higher than in June (FYE). Nevertheless, for most of the year, leverage is more conservative, compensating for the group's high business profile and closer to the 'BB' median for packaged food companies. Fitch forecasts lease-adjusted funds from operations (FFO) gross leverage at 4.7x for FY15 and approximately 6.0x (including outstanding factoring line) in December 2015, at the annual peak.

M&A Risk
M&A is an important part of management's strategy to support the group's scale and diversification by product and geography and is likely to reduce exposure to seasonality. At the current rating level, Fitch calculates that LFF's FCF generation capacity and moderate leverage provide some headroom for bolt-on acquisitions over FY15-FY17. However, any acquisitions leading to a significant increase in leverage could put negative pressure on the ratings.

Fitch assumes EUR15m spending per annum on potentially slightly margin-dilutive acquisitions from FY17, with no equity funding. Under these assumptions LFF's lease-adjusted FFO gross leverage at year-end should remain comfortably commensurate with a 'B' rating profile (4.5x at FYE18). In addition management has expressed commitment at further strengthening LFF's financial metrics.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case include:
-Mid-single digit sales growth driven by both organic growth and acquisitions
-EBITDA margin stable at 8.3% including potential margin dilution from acquisitions
-Working capital changes in line with sales development
-EUR28m capex per annum
-No dividends
-Annual bolt-on acquisition spending of EUR15m from FY16

RATING SENSITIVITIES
Positive: future developments that could lead to a positive rating action include:
-Strengthened business profile leading to sustainably improved profitability and cash flow generation
-Lease-adjusted FFO gross leverage below 4.0x at FYE and below 5.0x at end-1HFY (December, including factoring line)

Negative: future developments that could lead to a negative rating action include:
-EBITDAR margin below 7.5% on a sustained basis
-Neutral to negative FCF margin for two consecutive years
-Lease-adjusted FFO gross leverage above 5.5x at FYE and 6.5x at end-H1FY (December, including factoring line).